This article brings up a point I used to worry about - if people are just automatically pumping money into a list of stocks, how does the price remain connected to reality?

But apparently the answer is that mis-priced stocks present an arbitrage opportunity, so as long as a few people are paying attention, the price remains rational, and the remaining people paying attention are rewarded for doing so. The Economist had an article about this issue recently and they concluded that the main effect of Index Funds was to drive low-performance fund managers out of business.

Had the opportunity to speak to a Partner from Egerton Capital at a networking event last year and his was of the same view that there will be more arbitrage for them. It’s quite fascinating how markets have inherent mechanisms to self-regulate.

Another issue that he talked about was that these passive funds are black boxes that CEOs cannot communicate with. Usually, there is a healthy dialog between CEOs/CFOs and the investors, which is happening less and less. Some CEOs were in fact very worried because sometimes they would talk to investors prior to significant announcements and gauge their reaction, whereas now this is not possible anymore.